Invoice Discounting vs Factoring: What’s the Difference?

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Invoice discounting and factoring are both forms of invoice finance. They both involve selling unpaid invoices to a financial provider, who will then give you a cash advance on the majority of the unpaid balance. This releases funds tied up in unpaid invoices. These funds, when released, can be put towards business running costs or further business growth. 

But while the idea behind invoice discounting and factoring remains the same, there are a few key differences to consider before deciding what type of invoice finance to choose. So here’s everything you need to know about the differences between invoice discounting and factoring. 

Invoice Discounting vs Factoring: The Differences

Invoice Factoring Takes over Credit Control

One of the main differences between invoice discounting and factoring is who has control over the sales ledger. With invoice discounting, you remain in control of the sales ledger, and it remains your responsibility to chase invoices. 

But with invoice factoring, you sign over control of the sales ledger to your finance provider. They take on the responsibility for chasing invoices and your customers will settle their invoices with your business finance provider, rather than with you. 

Invoice Discounting Is Confidential 

With invoice factoring, your finance provider will deal directly with your customers, so your customers will know you’re using invoice factoring. 

However, with invoice discounting, your relationship with the customer remains the same. Your customers will make payments into a trust managed by your business finance provider. 

So, if it makes more sense for your business to have complete discretion, invoice discounting may be the more appropriate option for your business.

Invoice Factoring May Be More Expensive 

One of the main benefits of invoice factoring is your finance provider will take on almost all of the responsibility. They’ll chase invoices and deal directly with customers, and sometimes they’ll even take on the liability of invoices going unpaid. 

But because this involves more work for your lender, they may charge a higher fee than they might with invoice discounting. However, this gives you more time to focus on your business and work on expanding. 

So if you’re looking for the least expensive form of invoice finance, invoice discounting may be the best option. But if you’re hoping to receive a cash advance on unpaid invoices while also handing over the reins, invoice factoring may be best for your business. 

Invoice Factoring Can Be Less Risky for Lenders

Factoring is often seen as the least risky of the two invoice finance options because your finance provider has control over collecting payments. Finance providers may be more experienced when it comes to chasing invoices and may feel more confident being in direct contact with your debtors. 

Finance providers may also improve credit control with advanced credit checks. These checks reduce the risk of trading with customers who are likely to pay late — or not at all. 

With invoice discounting though, credit control remains your responsibility. Finance providers often consider this to be riskier because they don’t have control. For this reason, some providers will only offer discounting to businesses with higher turnovers. 

Convertibill’s Customer Finance is a modern upgrade on traditional invoice finance. We’ve combined the best of invoice factoring and discounting in one flexible finance plan to allow you to finance invoices of your choice, and trade exclusively with low-risk customers. Get in touch today to learn more.